“Value investors who are able to maintain their focus and resist the pressures inherent in the investment business to pursue short-term results have a multifaceted and adaptable tool kit that should allow them to prosper even in difficult times. First, by maintaining their discipline and by remaining patient in good times and bad, value investors own bargains — securities trading at a discount to underlying value which confer a margin of safety. This doesn’t mean those holdings can’t or won’t drop in price; it means that when they decline, they’ll be an even better bargain to which you are likely to seek to add. In difficult times, value investors certainly benefit from their relentlessly-kept discipline by having avoided highly-leveraged stocks, troubled financials, perpetually marginal businesses, and risky junk bonds. When the market drops, holders of such speculations quickly regret their choices.”
“Asset prices fluctuate much more than fundamentals. This happens because, rather than applying moderation and balancing greed against fear, euphoria against depression, and risk tolerance against risk aversion, investors tend to oscillate wildly between the extremes. They apply optimism when things are going well in the world (elevating prices beyond reason) and pessimism when things are going poorly (depressing prices unreasonably). Shortness of memory plays a major part in abetting these swings. If investors remembered past bubbles and busts and their causes, and learned from them, the swings would moderate. But, in short, they don’t. And they may be forgetting again.”
The key question in investing is, what is it worth, and what am I paying for it? Intrinsic value is what a businessman would pay for total control of the business with full due diligence and a big bank line. The French executives at Schneider who might be bidding for Tyco, haven‟t done all their due diligence yet, but they are saying the business is worth $30 billion. We do our sum-of-the-parts at Tyco and we get there as well. The biggest indicator to me is where the fully controlled position trades, not where the market trades it or where the stock trades rela-tive to comparables. Com-parables are interesting, but they are only one data point. Discounted free cash flows or replacement value are other such single data points. But when someone writes a check for the con-trol of a business, like it happened with Genzyme (Sanofi is acquiring it for $20 billion), that tells you what the business is worth. That to me is intrinsic value.
Daniel Kahneman writes “According to cognitive scientists, there are two modes of thinking, intuitive and reflective. (In recent decades a lot of psychological research has focused on distinctions between them. Richard Thaler and Cass Sunstein popularized it in their book, Nudge.) In intuitive, or System One, thinking, impressions, associations, feelings, intentions, and preparations for action flow effortlessly. System One produces a constant representation of the world around us and allows us to do things like walk, avoid obstacles, and contemplate something else all at the same time. We’re usually in this mode when we brush our teeth, banter with friends, or play tennis. We’re not consciously focusing on how to do those things; we just do them.
In contrast reflective, or System Two, thinking is slow, effortful, and deliberate. This mode is at work when we complete a tax form or learn to drive. Both modes are continuously active, but System Two is typically just monitoring things. It’s mobilized when the stakes are high, when we detect an obvious error, or when rule-based reasoning is required. But most of the time, System One determines our thoughts.
“Our principle in stock picking is simple; it must be a no-brainer. If you are struggling too long with an investment decision, it probably belongs to the ‘too hard’ pile, irrespective of what everybody else is doing in the market.”